Your Family is Probably Losing $155K from 401(k) Plan, and Why New Rules Won't Help

A two-income American family with an average income that dutifully invests in a 401(k) plan using typical strategies will lose $155,000 – or about 30 percent of what they should have saved for retirement -- to Wall Street fees, according to a study by an economic justice advocacy organization.

The Demos study, released last month, is just the latest in a long string of research showing 401(k) plans are a better deal for Wall Street than for you. Many show that people lose about one-third of their retirementmoney to fees that they don't even know they're paying. The actual lifetime impact of fees is a matter of widespread debate, but it shouldn’t be. In one dramatic example, John Bogle, the inventor of index funds, demonstrated how fees can consume 80 percent of an investor's money through something he’d dubbed “the tyranny of compounding fees.” (Click on the link to see his proof.) But some relief may be on the way. Regulations first set in motion in in 2007 (!) will finally kick in next week. Soon, 401(k) statements will include a fact box -- similar to the new info-boxes on credit card bills -- that lists the fee rates (“expense ratios’) associated with fund selections and shows in dollars how much the investor paid.

The disclosure box is a welcome change, but it's probably not going to make much of a difference, laments Robert Hiltonsmith, author of the Demos study.

"It will be underwhelming from a sticker shock point of view. It will not have the effect the doomsayers predict," Hiltonsmith said. The dollar amounts shown will reflect annual amounts, not the real harm from loss of compounding growth, he said. A 27-year-old with $10,000 invested in a mutual paying a 1 percent expense ratio will pay only about $100 in fees in a year, a number that will hardly inspire shopping around, Hiltonsmith figures.

But that benign-sounding 1 percent annual fee is the source of most 401(k) folly. Compounded, it can result in loss of one-third of retirement savings, or more.